Have you maxed out your HSA, 401K and/or IRA contributions? Have you contributed to the life insurance your company provides as part of their benefit offerings? Do you have more funds to invest and need a death benefit for your loved ones? You need to look at insurance as an investment.
If you are a significant time away from retirement, and don’t have excess income, you could consider a term insurance policy. Term policies are significantly less expensive for more insurance but ONLY provide a death benefit, no investment opportunity. Term policies also get more expensive for the same death benefit as you age. If you need a death benefit for your loved ones but have the excess income to use insurance as an investment as well as protection for your family, then consider a whole or universal life policy.
Permanent Life Insurance
Permanent life insurance allows you to accrue cash value that can earn investment capital gains, and it pays out to your dependents if you die. You can also tap into your cash value account to invest, pay policy premiums or take out a loan.
With whole life insurance your monthly premiums are fixed and the death benefit is guaranteed. Cash value grows at a minimum guaranteed rate which is slow compared to other investment types but can still grow to a substantial amount when holding these policies for the long term. The tax-deferred status of this policy can be a major benefit. The cash value of this policy will not be taxed while it is growing. You only pay taxes on the money when you withdraw it. If your loved one receives the income as your beneficiary upon your death, they don’t owe any taxes.
Universal life insurance allows you to adjust your death benefit and lower your premiums if your cash value in the account has enough funds to cover the policy costs. You can also index these policies and tie the growth of your cash value to a stock index. Variable universal life can offer a variety of investment options.
Your Advisor and Diversification
If you are choosing to use life insurance as an investment and a death benefit, the choices are varied enough that seeking assistance from an investment professional is recommended. Seth Wasserman, founder of Three Points Insurance Design, specializes in designing life insurance products for financial advisors and advanced insurance professionals across the country. Wasserman recommends following the 3 D’s for a life insurance investment.
Design – The policy should be designed to fit your individual needs and to minimize the internal costs.
Discipline – Permanent insurance is a long-term investment and unless you can afford to invest for at least 15 years in the future, you won’t have enough time to maximize the cash value through tax-favorable accessibility options. You must also have the discipline to consistently monitor and review the policy.
Dedication – You must be committed to making premium payments on time and as agreed. Maintaining the delicate balance between the death benefit and accumulating cash requires consistency. Sticktoitiveness is critical for this investment option.